Special Review
Study of the Benefits of the Office of Legislative Audits Establishing a Fraud Hotline June 2002
•
This report and any related follow-up correspondence are available to the public. Alternate formats may also be requested by contacting the Office of Legislative Audits as indicated at the bottom of the next page or through the Maryland Relay Service at 1-800-735-2258.
•
Please address specific inquiries regarding this report to the Audit Manager listed on the inside back cover by telephone at (410) 946-5900.
•
Electronic copies of our audit reports can be viewed or downloaded from the Internet via http://www.ola.state.md.us.
•
The Department of Legislative Services – Office of the Executive Director, 90 State Circle, Annapolis, Maryland 21401 can also assist you in obtaining copies of our reports and related correspondence. The Department may be contacted by telephone at (410) 946-5400 or (301) 970-5400.
June 18, 2002 Senator Nathaniel J. McFadden, Co-Chair, Joint Audit Committee Delegate Samuel I. Rosenberg, Co-Chair, Joint Audit Committee Members of Joint Audit Committee Annapolis, Maryland Ladies and Gentlemen: The Joint Audit Committee directed the Office of Legislative Audits to study the benefits of establishing a fraud hotline in the State of Maryland. The Committee also directed us to compare Maryland’s whistleblower law with those of other states. Accordingly, we are submitting the study results, the details of which are contained herein. In summary, we found that 21 state audit offices operated some type of formal fraud referral system (such as a hotline). Of the 13 states that responded to our survey, all but one audit office believed that the hotlines were worthwhile. Most states believed that hotlines serve as a deterrent to fraud and send a positive message to citizens about government’s concern for protecting public resources. Other than hotline call volume, few states had statistics on hotline costs and outcomes (such as, dollar value of losses identified). Because of the potential value, we believe the Office of Legislative Audits should begin operating, on a one-year trial basis, a fraud telephone hotline and web-based referral process. We believe the annual cost, using existing resources, would be about $150,000, and during the trial period these costs would be absorbed by our current budget. Regarding the whistleblower law, we found that expanding existing protection to include all State employees and employees of private companies under state contract could strengthen Maryland’s law. We will not proceed with implementing the fraud hotline and web-based referral process unless directed to do so by the Committee, after which it will take several months to develop and implement the necessary procedures. Respectfully submitted,
Bruce A. Myers, CPA Legislative Auditor
(This Page Intentionally Left Blank)
2
Table of Contents Methodology of Study
5
Fraud Hotline Findings
7
Results of Survey of State Auditors Background Benefits Operations Costs
7 7 7 7 8
General Accounting Office Experience
8
Fraud Hotline Recommendations
9
Implementation and Operational Overview
9
Cost Estimates
10
Findings from Review of Whistleblower Laws Comparison of Maryland’s Law to Other States Possible Enhancements to Maryland’s Law
3
11 11 11
(This Page Intentionally Left Blank)
4
Methodology of Study To accomplish our task we surveyed other state auditor offices that operated fraud referral systems. We identified these offices from several sources, including the National Association of State Auditors, Comptrollers and Treasurers, and determined that 21 of the state auditors (42%) operated some type of formal fraud referral system. Additionally, one state auditor recently discontinued its fraud hotline. We also obtained pertinent information from the United States General Accounting Office about its fraud referral operations. We prepared and mailed a formal written survey to 18 of these states that was intended to quantify the costs and benefits of each state’s fraud hotline and identify operational practices. Survey questions covered four areas: !
background about the auditor’s office and the history of its hotline;
!
benefits derived from the hotline (including the number of calls and the number and dollar amount of subsequent frauds uncovered);
!
operation of the hotline (including staffing); and
!
hotline costs.
In addition, using the Internet, we conducted an independent review of various states’ “Whistleblower” laws to identify potential enhancements to Maryland’s law. Our intent was to identify provisions that would add greater protection to the whistleblower, or make an employee more likely to report potential occurrences of fraud, waste or abuse. Our study did not constitute an audit conducted in accordance with generally accepted government auditing standards.
5
(This Page Intentionally Left Blank)
6
00Fraud Hotline Findings Results of Survey of State Auditors Thirteen states responded to our survey. The detailed responses were diverse, but we could draw some common conclusions about the benefits of a fraud hotline. Specifically: Most states surveyed had toll-free hotlines, promoted on websites & in phonebooks, targeting state employees
Background • 12 of the 13 states’ hotlines used toll-free telephone numbers. • The most common forms of hotline promotion were in a state telephone directory and on the auditor’s website. • The main target audience of the hotlines was state employees, although several respondents also targeted the public. Benefits •
Hotlines are generally considered a deterrent to fraud
All but one state considered the hotline a valuable tool. The one state did not think it valuable because of the unreliability of tip information. Most states believed the hotline served as a deterrent to fraud and that it projected an image of a proactive state government that is concerned about detecting fraud, waste and abuse. • The annual number of calls received ranged from 25 to 7,500, with a median of 200. • The annual number of resultant viable leads as a percentage of calls received ranged from 3% to 75%, with a median of 20%. • Few of the auditor offices maintained statistics on the results of hotline investigations, so we received little information about the number of resultant indictments or arrests, or the dollar amount of losses identified and the amounts recovered. Several states mentioned, however, that occasionally a significant fraud would be uncovered that, absent a hotline, might have gone undetected.
Operations • Calls were prioritized, with some referred to other oversight agencies for follow-up
•
All 13 respondents operated their hotlines internally, logging all calls including anonymous tips, using dedicated staff to answer the calls. One state did note that it was considering outsourcing the operations. Most states did not investigate all calls, but used a system to prioritize the calls, and all states referred certain leads to other organizations within state government, as appropriate (for example, complaints of workplace discrimination were referred to a state personnel department or EEO). 7
Staffing patterns varied widely between states
• •
Most of the auditors did not provide feedback to the hotline callers. No pattern of staffing was discernible, with most audit offices using a combination of full and part-time staff to operate the hotline (ranging from one to six employees), and to investigate leads when not referred to other agencies (ranging from one to ten employees).
Costs Most states did not keep detailed cost records
•
Most states did not keep detailed records of hotline operating costs or prepare a formal cost/benefit analysis. This would seem consistent with the belief that a hotline’s inherent value is that it acts as a deterrent and is a visible sign of government’s commitment to identify fraud, waste and abuse.
General Accounting Office Experience GAO has deemphasized its fraud hotline in favor of webbased referrals, which it believes is more effective
As part of our study, we also met with representatives of the United States’ General Accounting Office (GAO). In the past, the GAO focused on the operation of a toll-free hotline, but several years ago, changed its emphasis to the electronic submission of tips on its website (“FraudNET”) using a web-based form. It found that this process has greatly reduced the number of frivolous tips and led to improved investigative results. The GAO attributed this improvement to a greater level of detail that the submission of electronic forms requires when compared to the informal nature of the telephone hotline. As with the majority of state auditors, the GAO also will assign certain tips to other government agencies for appropriate follow-up. We searched all of the state auditor Internet websites, and found that 16 state auditor offices encouraged electronic submissions, including 4 states that did not maintain toll-free hotlines.
8
Fraud Hotline Recommendations Because of the potential benefits, we recommend that a fraud telephone and email hotline be implemented for a one-year trial period. Most states believe that hotlines serve as a deterrent to fraud and send a positive message to citizens about government’s concern for protecting public resources. Although we could not quantify the tangible benefits of operating a hotline from our survey, an obvious conclusion is that there is a greater chance of a fraud discovery with a hotline than without. In its 2002 Report to the Nation, the Association of Certified Fraud Examiners stated that organizations with fraud hotlines cut their fraud losses by about 50% per scheme. To help identify tangible benefits, we propose to record operational statistics and results during this trial period as well as the costs of operation. We would report the results to the Committee to determine if the process should be continued, revised or discontinued.
One-year pilot of a toll-free fraud hotline and webbased referral system, tracking statistics & results
Implementation and Operational Overview If the Committee concurs with our recommendation to establish a fraud hotline, we will develop specific operational details for the collection, prioritization and investigation of referrals. Generally, we propose the following: Primary target audience would be State employees
Calls would be recorded and prioritized, with some referrals to other State agencies
• •
•
•
To establish both a toll-free hotline and a fraud referral system on our website. We would accept anonymous tips. Our primary focus would be referrals from State employees, so we would include our toll-free number in the State phone book, on our website and on our stationery. In addition, we would take advantage of an offer from the Central Payroll Bureau to add a message about our fraud hotline and website to State paycheck stubs. An answering machine would be used to record all hotline tips, which would be periodically logged and screened. Although calls would default to an answering machine, the system would allow a caller to speak directly with someone involved in the fraud investigation process, if they so chose. We envision a weekly screening of the answering machine, with a similar retrieval system for the submissions to our website. Since we would prioritize all tips based on potential merit, it is very likely that some would be deemed immaterial or without merit and would not be investigated.
9
•
•
•
We would refer tips received that relate to frauds presently investigated by other agencies to those agencies for follow-up and action, as appropriate. For example, we would refer tips pertaining to client welfare fraud to the Department of Human Resources; Medicaid fraud to the Office of the Attorney General; and insurance fraud to the Maryland Insurance Administration or to the Department of Labor, Licensing and Regulation when it relates to unemployment. If an investigation leads to a finding of abuse or illegal activity the results may be issued in a special report or in our next regular audit report of the agency. In addition, if an investigation results in evidence of potential illegal activity, we would refer the matter to Office of the Attorney General (which is our current procedure). Finally, hotline statistics for the trial period would be reported to the Committee. We anticipate that the annual equivalent of 2 full-time auditor positions would be needed during the trial period to operate the hotline/web-site referral system and investigate tips (see following cost estimates).
Cost Estimates Estimated $150,000 annual cost, using two auditor positions
Without a reliable estimate of activity, it is difficult to project operational costs with any degree of certainty. However, based on median activity obtained from the surveys, we estimate an annual cost to operate and investigate fraud referrals from the hotline and our website to be $150,000. During the one-year pilot period, we would fund these costs from our existing budget. The greatest portion of this cost is the salary (including fringe benefits) of two auditor positions to screen and investigate the referrals. We derived our estimate of positions needed from the minimum number of positions used by other state audit offices (the survey noted a minimum of one employee for operation and one employee for investigation). This seems reasonable given the median activity obtained from our survey, which is that we can expect 200 calls and/or web-based submissions annually, with about 40 requiring some degree of investigation on our part. However, as there is no accurate basis for projecting activity, the number of calls, and therefore the related costs, could significantly differ from the current estimate. Any other costs would be nominal and would be absorbed by Department or Office overhead. Specifically, the cost of a toll-free hotline based on an estimate of several hundred calls would probably be less than $100 annually. Appropriate modifications to our website for electronic submissions would be made internally at virtually no cost.
10
Findings from Review of Whistleblower Laws Comparison of MD’s law to other states did not disclose any mandatory changes before establishing the hotline
Comparison of Maryland’s Law to Other States We reviewed the whistleblower laws from 17 states surveyed by comparing them to Maryland’s law for “coverage” and “remedies”. (A 2000 survey of the National State Audtiors Association indicates that 39 states have whistleblower laws.) We concluded that Maryland’s law is generally consistent with those of the other states in most respects. Consequently, no changes to the law would be necessary prior to our establishment of a fraud hotline.
Possible Enhancements to Maryland’s Law Although no changes to Maryland’s law would be required before implementation of a fraud hotline, our comparison with other states’ laws disclosed three areas where Maryland’s law could be strengthened. These enhancements would expand coverage under the law, increasing the potential population of persons likely to report a fraud, as well as strengthen the penalties for violating the law. Specifically, the Committee might want to consider the following enhancements to the Maryland whistleblower law: 1. MD law could be enhanced by adding coverage for:
• •
All state employees Employees of State contractors
and by providing civil penalties for workplace retaliation
Coverage afforded by Maryland’s law could be expanded to all State employees. Currently, Maryland’s law only provides protection for Executive Branch employees, while 14 of the 17 states’ laws covered all state employees, regardless of their branch of government.
2. Protection could be extended to employees of State contractors and consultants. We noted a significant provision in 4 of the 17 states’ laws that extended protection under the whistleblower law to the employees of private companies under state contract. Given the significant use of state contracts in Maryland, especially in the areas of information technology and construction, the advantages of such an extension of protection from a fraud detection aspect appear to be considerable. 3. Civil penalties for those individuals guilty of retaliating against whistleblowers (in the form of a personnel action) could be added to Maryland’s law. Specifically, Maryland’s whistleblower law is in the minority, as it does not provide for civil damages to the whistleblower employee in the event of retaliation by a supervisor. Maryland’s law permits administrative remediation within the Executive Branch, with the right of appeal to the Office of Administrative Hearings; however, 14 of the 17 states also permit civil actions, including punitive damages against violators of the whistleblower laws to discourage retaliation against whistleblowers. 11
AUDIT TEAM Gregory A. Hook, CPA Audit Manager
Raymond G. Burton, CPA Senior Auditor
Nadine L. Forgenie Staff Auditor